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Currency Transfers And Foreign Exchange


Fluctuations in exchange rates can make a big difference to your income as an expat, especially where large sums of money are involved. For example, in 2007 the pound to euro rate was approximately 1.40, making £100,000 worth €140,000, whereas in 2009 the rate was approximately 1.08, making the same £100,000 worth only €108,000.

Those working or retiring abroad may be receiving smaller but regular payments through either wages/salary or their pension. These differences will fluctuate each month as the exchange rate is changing all the time - something that must be taken into account before accepting a job or considering a move.

One solution is to ensure payment is made in the currency of the country where one will be living and working, although this is only ideal as long as those with families actually have their families with them. Those whose families will not be making the move, for example those with short term contracts where it is not financially viable for a company to relocate a whole family for a short period, may find that they hit the same problems transferring a portion of their wages back home.

Ensuring that wages are paid in the currency of the country one is currently living in means that a fair salary can be negotiated taking into account cost of living. This also means that there will be no transfer charges when moving from one currency to the next, although many will find that it is compulsory to have a bank account in the new home country in order to make payments.

This of course will not help those receiving a state or private pension, as the money will be paid only in the home currency. This means that each month the amount of money received will vary, and therefore trying to budget will be difficult. Of course, if moving to a country whose cost of living is extremely low then even low income expats such as pensioners may find that their money stretches further even if the exchange rate is weak and they should still have a comfortable standard of living.

However, the cost of living in a country depend on many factors including the country’s national debt. Some people living abroad have found that the effect of tax rises in response to burgeoning national debt has had the effect of greatly increasing their typical shopping bills and some expats trying to live on a pension may find that they are now struggling if exchange rates are low and cost of living is high.

The currency exchange rate also affects tourism which may in turn affect expats living in the local area. Countries that rely heavily on tourism - often those countries popular with expats - may find that holiday makers choose to go elsewhere where their money is worth more., again causing the cost of living to rise.

Withdrawing money from a foreign bank account can be costly for many expats, and the value received one day may not be the same the next. If it is essential to withdraw money this way, it is advantageous to take out larger sums less often as banks usually charge per transaction.

The currency exchange rate is one of the potential pitfalls of living and working abroad, and a slump in a currency’s value can last for several years. This is often the breaking point for many people who choose to live abroad, especially retirees who do not work in their chosen country and may find they receive few or no benefits when times are hard, as they have never worked or paid income taxes to the state. If they must rely solely on their private income from pensions or other sources, when times are hard and the exchange rate is not in their favour some people find that their pensions are just not enough to cover all of their living expenses and decide to give up their new life abroad.

Careful planning for the future can help to prevent this situation. For example, when exchange rates are favourable, one option is to try to save a little of the money for the future, when times may be hard. Of course, expats who have decided not to return to their home country - such as those who have gained residency status and are working and paying taxes to the government of their new country - may find that fluctuating exchange rates do not affect them at all. They are already being paid each month into a local bank account, in the currency of their new country, with no need to make expensive transfers and withdrawals.

Transferring Money Overseas

There are many ways of sending money from one country to another. As always, expats can save themselves a lot of trouble and expense if they do a little research and shop around for the best deal.

International Bank Transfers

For most expats, currency transfer involves transferring small to medium sized amounts regularly from an existing bank account back home into a new overseas bank account in the local currency. These may be pension payments, benefits, or any other form of income.

Your home bank will usually be glad to oblige. You can set up facilities with them ‘on demand’ whereby you fax or call them on the phone, provide a secret code or two, tell them the amount in question, and they’ll transfer it to your new bank, automatically converting it into the relevant local currency. Some banks also allow you to make international payments online. Whatever method you choose, transfers normally take between 3-7 days although 1-2 day transfers are often available but be prepared to pay more for these.

You can also set up regular transactions that are processed automatically on a fixed day of each month. Many state pensions and benefits can be paid directly into your new bank abroad without going through your home bank at all. Some private pension organisations may also offer the same facility.

When you first set up a transfer of funds abroad, the sending bank or institution will ask you for various codes that identify the destination bank. Often they will ask for IBAN (International Bank Account Number), BIC (Bank Identifier Code) or SWIFT codes but don’t panic – your new bank will give these to you and they may even already be listed in your new chequebook or bank statements.

As far as charges are concerned, you will probably be required to pay a flat fee per transaction. Additionally a percentage fee is often charged for the currency conversion itself. You may also find that your receiving bank charges you for receiving the transfer. Charges vary by bank but can quickly add up - ask your bank(s) for an indication of the fees involved.

As a general rule, transferring larger sums less frequently usually works out cheaper than transferring smaller amounts more often. However, if you need to transfer regular amounts of at least a few hundred pounds/dollars or need to make a larger one-off payment (e.g. for a house purchase) you should consider the services of a currency broker.

Cash Machine/ATM Withdrawals

Thanks to modern technology, most people abroad can go to a cash machine/ATM and withdraw local currency funds directly from their home bank account. This is a useful option to have for expats but exercise caution - many banks make hefty charges for using this type of facility. You may also find that withdrawal limits are in place (as a security measure) even if you significant funds in your account back home.

You can also use VISA or Mastercard credit cards to obtain cash in this fashion and if you pay the amount off quickly and avoid interest charges then fine – but once again credit card charges for cash withdrawals can be high. Check the rates carefully.

Currency Brokers

Currency brokers (also called foreign exchange brokers) offer significant advantages over traditional banks. Firstly, brokers will often be able to offer you a better rate than your bank. Secondly, the entire process is more transparent - many banks require you to accept the exchange rate available on the day they process your transaction, whatever and whenever that may be, but a specialist broker will offer greater flexibility, even allowing you to specify the rate you want in advance.

Currency brokers are smaller companies than major banks so always check their background carefully. Ask existing expats for their own experiences and recommendations before choosing a firm to handle your own foreign exchange requirements.

A good broker will discuss all the options with you and enable you to make the best decision for your circumstances. Using a broker will typically off the following advantages:

1) Currency brokers generally provide superior exchange rates to the high street banks. The currency brokers have access to the interbank rate and do not have the high costs that the banks have. This means that they can usually offer better exchange rates.

2) Use of a free Market Watch/Order Service: This allows you to tell your currency broker your target or budget exchange rate and they will ring you if that exchange rate level is reached. As the rate moves every few seconds, currency brokers can act as your eyes and ears on the market.

3) Ability to fix the exchange rate in advance using a Forward Contract. If you know you need to convert/move funds in the future but don’t yet have the money you can reserve a rate in advance using a Forward Contract. During this period, you are exposed to exchange rate movements and therefore, a forward contract is ideal if, for example, you have agreed to buy a house and want to fix the rate now but will not be making payment for a couple of months.

A forward contract is when you fix an exchange rate for a pre-agreed date in the future. You can fix a forward exchange rate for any period from 1 week up to 1 year in advance. There’s no cost for a forward contract and no payment is made until the settlement date, except for a small deposit of 2% to 10% depending on how far ahead you would like to fix the rate.

A “forward contract” is fixed at the “forward rate” which usually differs slightly from the “spot rate” (the rate for immediate transfer). The difference between the 2 rates is the “forward points”. The Sterling Euro forward points, for example, are a straight arithmetic calculation of the difference in the interest rates between the UK and the Euro-zone. When UK interest rates are higher than Euro rates, the rate will go down slightly as you reserve further into the future. If UK rates were to fall below Euro rates, the rate would go up for a forward contract. This is most easily explained with 2 examples.

1) At the end of June 2005, UK interest rates were 4.75% and European rates were 2%. i.e. a difference of 2.75%. You could have fixed an immediate deal with a currency broker at 1.50. If you wanted to book a 1-year forward contract, i.e. fix the exchange rate for 24th June 2006, they would have reduced the exchange rate by approximately 2.75% (i.e. around 1.4588). Although the exchange rate appears worse, you can keep your pounds on deposit in the UK at 4.75% for a year whereas if you had transferred them to Europe immediately you would only receive 2% interest (or less). If you factor back in the extra interest you would be receiving in the UK, you are still converting at an effective rate of 1.50.

2) If you were buying in France, had signed the Compromis at the end of June 2005 and were due to pay the notaire a month later, you could have fixed a rate with a currency broker for the end of July at 1.4950. Although the rate could have gone up from here and you would still have converted at 1.4950, you would have been protected from the rate falling. In fact by the end of July 2005, the rate had fallen to 1.4350. On a €295,000 property the forward contract would have meant you paid £197,324.41. If you had waited and converted at the end of July, you would have paid £206,293.71 - almost £9,000 more!

Timing your currency exchange correctly

Fluctuations in the exchange rate can make a tremendous difference to the value of your funds when moving your money overseas. Therefore, it is vital to time your currency exchange correctly so that you can get the most for your sterling. Leaving the exchange until the last minute could cost you hundreds, or even thousands, if the exchange rates move against you or money is converted at a poor rate.

Economic data releases, such as interest rate announcements, and house price and unemployment information, can have a huge impact on exchange rates. For example, when a country’s government announces it is going to raise interest rates, this typically increases the value of the currency and can therefore have a positive impact on the exchange rate. Likewise, if a country announces that its economic output is falling or that it is going to drop its interest rates, this can have a negative effect.

The global recession has resulted in the currency markets being even more volatile than before and rates can move by several percentage points over the course of a single day.

Specialist foreign exchange brokers follow the markets closely and provide a bespoke service to their clients to help them achieve the best exchange rate for their transfers, and offer a number of different products to achieve this. Currency brokers can give you a valuable insight into how the rates are moving and the outlook for the coming days, weeks or months.

If you do not need to make an exchange immediately it may be beneficial to hold off for a few days if there is a chance that the exchange rate may improve. Some foreign exchange brokerages have a team of in-house economists who publish daily economic updates about the market and upcoming data which may impact the rate.

The main benefit to exchanging money through a FX specialist rather than a bank, though, is cost. Foreign exchange firms keep their clients fully informed of movements in the markets and offer far superior exchange rates than they would normally get from high street banks. Savings can vary from between 1 and 4 per cent on the exchange rate alone, and specialists do not typically charge any fees for transmitting the funds abroad, unlike the banks which can levy as much as £40 in fees or charges. Therefore, if you are emigrating and transferring a large sum of money – such as the proceeds of a property – a foreign exchange company could potentially save you thousands.

There are a number of different FX options available to emigrants and a qualified broker can explain these to you and advise on the most suitable hedging strategy, based on your circumstances.


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